FASB Chairman: No Retreat on Leases

Editor's note: On April 14, FASB and the IASB
said the priority projects on revenue recognition, leases and
financial instruments, scheduled to be completed in June, would
require a few more months of work. No specific deadline was set for
the projects. Read "FASB, IASB Announce
Delay on Priority Projects" for more information.

In
part four of this exclusive JofA interview, FASB
Chairman Leslie Seidman explains why the board’s revised approach to
lease accounting will not be a return to business as usual.

JofA:At your Feb. 17 joint meeting, FASB and the IASB
tentatively decided to delineate financing leases and
other-than-financing leases. Does this signal a shift closer to
the two types of leases—operating and capital leases—that we’re
familiar with in current GAAP? Or, is this something different?

Seidman: It
is something different. The primary objective of the leasing project
is to reflect material lease obligations and commitments on the
balance sheet to the extent of the promises that have been made in
the arrangement. The decision that was made in February does not
affect that at all. We would still reflect leases on the balance
sheet—and I’m mostly speaking from the lessee perspective here,
because the lessor does, in fact, sometimes take commitments off the
balance sheet depending on the terms. But, for the lessees, they
would still reflect lease commitments on the balance sheet. The
board will, however, consider whether there should be an exception
for short-term leases.

What
we were talking about at that meeting was distinguishing between the
two, primarily for the purpose of income statement recognition. The
financing side of that line, which exists today, requires that the
right-to-use asset be amortized, and that interest expense be
recognized on the lease obligation. This proposed delineation would
not change that for the financing arrangements. On the other side,
what we are exploring is whether there are some lease arrangements
that are not entered into primarily for financing purposes, and
therefore, whether a different pattern of income statement
recognition would be appropriate for those.

Now
the pattern that we’re talking about is something that would
generally be straight-line, which is similar to the expense pattern
today for operating leases. We are exploring that approach because,
overwhelmingly, investors and preparers of financial statements told
us they did not think that having that “as-if-purchased” pattern of
amortization and interest expense in the income statement was
relevant for these particular types of arrangements.

JofA:Just to clarify, that discussion was a tentative
discussion to this point. The boards have not made a final
decision on these issues.

Seidman:
Right. I would describe it as a tentative decision, giving the staff
direction to explore that change in approach further. They will be
bringing back to us a couple of topics. Number one, how would we
best articulate the line between financing and other-than-financing
[leases]. Then, number two is, specifically, how would you implement
that delineation to achieve a different pattern in the income
statement?

On
leasing, I think that we are in a similar situation to the one I
described for revenue recognition. We’ve made some initial decisions
to make simplifications to the model relative to what we had
exposed. However, at our [March 2] meeting, the staff came to us
with a couple of changes that they proposed and asked for time to do
outreach, to check with constituents right now about whether these
changes that they’re proposing are viewed as responsive to the
concerns that were raised, operational, and, again, are they
perceived as improvement?

JofA:Would this be part of the field-testing?

Seidman: I
use the word “field-testing” sparingly, because, to us,
field-testing means a full-blown attempt to implement the standard.
That’s not what I’m talking about. I’m talking about what I’ll call
fieldwork, where we go out and have something short of a field-test
to discuss a particular idea or proposal with constituents, when we
think that a well-prepared, well-informed conversation will give us
the input we need to know whether we’re on the right track.

So,
at this point, that is the approach that I’m talking about—that we
will meet with a variety of companies, auditors and investors to
test these ideas and see if they think that it’s responsive to the
concerns that have been raised. Our plan is to run that kind of
outreach or fieldwork in parallel with our re-deliberations. I’ll
just reinforce the point I made before, I’ve added staff to these
teams to help us with that.

JofA:Is it still realistic at this point for the leasing
project to be finished by the end of the second quarter?

Seidman: Our
plan is to continue to work through these issues with June as our
goal for completion. But the June date is just a target date to
signal our commitment to try and work through these issues as
efficiently as we can. But, if we need more time to conduct this
thorough process that I’m describing, we will take the time we need.
It is much more important to me that we end up with a standard that
is perceived around the world as an improvement, and that is
operational and comprehensive. In other words, ready for prime time
the first time we issue it than to meet any particular deadline.

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